News Analysis

Angst Over Tech Outlook Grips Investors

Sell-Off Puts Nasdaq Near April 14 Low; Broad Market Slips

NEW YORK — Technology stocks plunged anew Wednesday, dragging the Nasdaq composite index to its lowest close since the April 14 market collapse.

The index slumped 200.28 points, or 5.6%, to 3,384.73, ending just 2% above the April 14 closing low of 3,321.29, as the late-April rebound in many tech shares all but evaporated.

One catalyst for Wednesday's sell-off was an analyst's downgrade of wireless technology giant Motorola, which tumbled $17.75 to close at $86.75.

But pessimism about tech stocks' trend has been building in recent sessions, as many analysts have warned that last month's rebound in the stocks was less than convincing--and as even the biggest and most popular tech names have begun to slide again.

Among the day's losers were Apple Computer, down $6.13 to close at $99.31; Sun Microsystems, down $4.31 to $77.81; and Qualcomm, down $7.69 to $97.31.

The broad market also dropped Wednesday, with the Dow industrials losing 168.97 points, or 1.6%, to 10,367.78, also the lowest since April 14. The Standard & Poor's 500 index fell 2.1%.

Although trading volume on Nasdaq remained modest at 1.58 billion shares, losers swamped winners by 33 to 9, suggesting that buyers are few and far between for tech shares, even at prices 30% or more below their recent peaks.

The Nasdaq index now is 33% below its March 10 record close of 5,048.62.

With the Federal Reserve threatening to get more aggressive about raising interest rates, and with tech stocks' price-to-earnings valuations still historically high, many analysts see no hope for a significant rally soon.

"I don't see the market coming up for air until people think the Fed is reversing itself, after the economy starts to slow," said Edward P. Nicoski, technical market strategist at U.S. Bancorp Piper Jaffray in Minneapolis.

Analysts now expect the Fed at its meeting Tuesday to boost the benchmark federal funds rate for overnight bank loans by one-half percentage point, to 6.5%, which would be the highest since January 1991.

A half-point boost would be an escalation of the central bank's current campaign to slow the economy and keep inflation under control. The Fed has raised rates five times since last June, but each increase was a quarter-point.

Investors hoping for a more moderate Fed move were discouraged by news Wednesday that a key index of U.S. commodity prices hit a two-year high. Helped by gains in natural gas, cotton, soybeans and platinum, the Commodity Research Bureau/Bridge index of 17 raw materials rose 0.8% to 218.93, the highest close since May 22, 1998.

A big question for the stock market now is whether a drop below the April 14 Nasdaq close would trigger heavy new selling by investors who bought into both the early-April Nasdaq rebound and the recent rebound--and have been burned twice.

The Nasdaq index fell as low as 3,649 intraday April 4, then rebounded to 4,446 by week's end.

The following week the index plunged a record 25.3%, culminating with the 9.7% drop Friday, April 14, to 3,321.

By May 1, the index had worked its way back up to 3,958, a 19% gain from April 14.

Will burned investors now throw in the towel?

Some analysts don't believe the market is poised for a dramatic new plunge.

"The risk of a steeper decline isn't that great," Shields & Co. market analyst Frank Gretz said. "Most stocks have gotten whacked enough already. The risk is that we stay in a trading range for an extended period."

Some analysts have been encouraged that even as tech stocks have struggled in recent days, other market sectors have rallied. Traditional "defensive" sectors such as consumer products, foods and utilities, for example, have perked up in recent weeks.

Avon Products, up $1.63 to $41.81 on Wednesday, Anheuser Busch, up $2.13 to $75.94, and Coca-Cola, up $2.31 to $52.81, have rallied 64%, 40% and 22%, respectively, from their February or March lows.

Nicoski calls such stocks "the new cash," arguing that money managers under pressure to stay fully invested in the market are moving into staid, blue-chip names when higher-risk growth sectors turn negative, whereas 10 years ago they would simply have gone to cash.

One result of that strategy is that it prevents--or at least postpones--the kind of "blowoff" that analysts expect to see at the end of a bear market: a sharp sell-off on huge trading volume and nearly unanimous negative sentiment.